UPDATE 1-Brazil eases tax rules for smaller firms to boost investment

Mon Jun 16, 2014 11:46am EDT

(Adds details on measures, comments, from paragraph 2)

By Aluísio Alves

SAO PAULO, June 16 (Reuters) - The Brazilian government, seeking to unleash more financing for smaller companies, on Monday eased a series of tax and borrowing rules to fuel more investment in the struggling sector.

Finance Minister Guido Mantega said investments in shares of mid-sized companies will be exempted from income tax through 2023. Investor purchases of infrastructure notes, or debt issued by companies to finance construction and heavy investment projects, will be exempted from tax on capital gains.

Mantega also announced that mandatory withholding of income tax on investments, which is known as "come cotas" and for years has been the target of heavy criticism by investors, will be eliminated for purchases of exchange-traded fixed-income funds. The rules will be included in an executive decree within a few weeks, he said.

The reduction of the capital gains tax is effective immediately, but the government is unlikely to renounce a significant amount of tax revenue with the measures, he noted.

"The benefit for the country's smaller companies is evident. We foresee a more beneficial environment for financing of mid-sized enterprises - these measures and the growing dynamism of our capital markets will help companies a lot," Mantega told reporters.

The decision comes after years of efforts by government officials, investment bankers and industry groups to lower the tax burden on potential sources of funding for infrastructure and industrial companies. More than 200 companies could take immediate advantage of these measures, Mantega said.

The government is speeding up targeted reductions in taxes on financial investment, borrowing and other financial instruments to revive investment, which is currently at the lowest level in more than three years and is slowing economic growth in Latin America's largest economy.

In recent months, demand for corporate loans has stagnated in the wake of a jump in domestic borrowing costs. The central bank raised the benchmark Selic overnight lending rate to the highest level in more than two years to head off inflation.

As a result of that and because of growing uncertainty over the economic outlook, no initial public offerings have been registered this year - the worst start to a year in Brazil since at least 2004. Bond offerings are down in the first five months, compared with the same period a year earlier, data by Thomson Reuters shows. (Reporting by Aluísio Alves; Writing by Guillermo Parra-Bernal; Editing by Chizu Nomiyama and Dan Grebler)

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